Mizuho, Korea’s Mertiz to launch $900 mn fund to buy 20 aircraft portfolio from GE

  • 2016-11-07

Mizuho Securities Co. Ltd. and South Korea’s Meritz Securities Co. Ltd. will set up a fund of about $900 million to acquire a 20 aircraft portfolio from GE Capital Aviation Services (GECAS), while the National Pension Service (NPS) backed out of the fund.

737 MAX-8 GECAS Artwork

737 MAX-8 GECAS Artwork

The fund, reportedly set to be launched early next month, will be the largest and first domestic fund investing in more than a dozen airplanes simultaneously. The multiple plane-composed portfolio is expected to generate steady lease incomes, in addition to profits from a possible sale of the aircraft.

But the NPS decided not to participate in the fund, after reshuffling of its senior managers in July.

Meritz will provide mezzanine and subordinate financing in the form of equities for a sum of $244.5 million: $150 million in mezzanine tranche and $94.5 million in subordinate tranche, investment banking sources told the Korea Economic Daily on Nov. 3. Separately, Mizuho Securities will raise 750 billion won ($655 million) by issuing asset-backed securities which will make up the senior tranche of the fund.

The 20 planes, which the fund will buy from GECAS, are leased to low-cost carriers, including flagship carriers in China and other countries. Narrow-body planes take the majority of the 20 aircraft: generally, they are utilized on short-haul routes and in high demand. The aircraft in the portfolio have an average 7.6 years remaining on the lease, longer than the fund’s duration of seven years, according to the report from the Financial News, a South Korean daily.

Each airplane in the portfolio has individual and separate financing portfolo, which would spread risks for investors.

The aircraft leasing fund will consist of two tranches of senior financing which will guarantee annual returns of 4% and 5%, respectively; mezzanine equity offering an annual return of 7% and subordinate tranche for a 13% return.

Meritz plans to sell down its holding of the mezzanine tranche to domestic institutional investors through Korea Investment Management Co. Ltd.

Meanwhile, the Financial News reported on Nov. 6 that GECAS, an aircraft financing and leasing company of GE, will also take part in the financing by acquiring 9% of the non-senior portion. It will also provide maintenance services for the aircraft. The daily added that Mizuho and Meritz had already signed an agreement with GECAS to buy the 20 airplanes.

NPS, MIRAE ASSET BACK OUT

The aircraft fund had been originally prepared by Mirae Asset Daewoo Co. Ltd., a South Korean securities house, together with Mizuho. But Mirae backed out of a plan to commit its own capital to the fund, after the brokerage house acquired the former Daewoo Securities Co. Ltd. Market rumors had it that Mirae Asset Chairman and founder, Hyeon-joo Park, folded the plan which Daewoo Securities had prepared.

After the NPS and Mirae Asset Daewoo pulled out, Meritz Securities jumped in the fundraising, renegotiating the pricing and investment conditions with GECAS.

“Compared to the previously-sold aircraft funds, this one offers relatively high coupon rates,” the Financial News quoted one of the sources as saying. “Aircraft funds are free from U.S. interest rate rises, compared to offshore real estate investments, and airplane services focused on passenger transportation are less vulnerable to global economic cycles, compared with ships which are used for cargo in general.”

Year to date, accumulated investment in aviation financing by South Korean institutions is estimated at around 400 billion won ($350 million), the Maeil Business Newspaper said on Nov. 4.

“Many institutional investors, in order to boost returns, are seriously considering investing in aircraft as part of strategic asset allocation,” Maeil quoted a source of a local savings fund investing in aircraft as saying. “They used to have real estate-focused alternative portfolios before, but now they are expanding into aircraft, infrastructure and private debt funds.”

In a recent survey of the chief investment officers of 20 major South Korean institutional investors by the Korea Economic Daily, 13 of the 20 respondents said they have invested or considering investing in aircraft-leasing business.

Meanwhile, last December South Korean brokerage Kyobo Securities Co. Ltd. failed to raise 1.2 trillion won for a domestic fund to buy four superjumbo jets, A380 aircraft, which it planned to lease to Emirates Airline.

By Daehun Kim and Donghun Lee

daepun@hankyung.com

<Edited by Yeonhee Kim>